For Hormel Foods (HRL), analysts’ consensus estimate for the adjusted EPS in the third fiscal quarter stands at $0.39, which represents 14.7% growth on a YoY (year-over-year) basis. Higher sales and the lower tax rate are expected to cushion the bottom line. Share repurchases also provide an upside to the EPS.
Analysts expect the company to report a gross margin of 19.8%, which represents a contraction of 70 basis points on a YoY basis for the third fiscal quarter. The SG&A (selling, general, and administrative) expenses are expected to increase 10.1% to $194.5 million. The operating margin is expected to be 11.8%—compared to 12.7% in the third fiscal quarter of 2017.
Hormel Foods’ management has cautioned that freight costs will continue to have a negative impact on the company’s profitability in the second half of fiscal 2018 and fiscal 2019. Advertising expenses are also expected to increase 20% in fiscal 2018 as the company invests in brands like Skippy, Spam, and Natural Choice.
Packaged food manufacturers including Campbell Soup (CPB) and Conagra Brands (CAG) are facing challenges due to rising expenses (commodity inflation, logistics, and packaging costs), which makes them resort to aggressive cost cuts.
Hormel Foods’ second-quarter performance
Hormel Foods’ second fiscal quarter adjusted EPS of $0.44 fell short of the consensus of $0.45. However, the adjusted EPS rose 12.8% on a YoY (year-over-year) basis. Increasing sales and a lower provision for income tax offset the escalating expenses.
The gross margin contracted by 100 basis points to 21.3% due to the higher cost of goods sold. The SG&A expenses rose 12.6% to $203.8 million due to higher advertising expenses and acquisition-related expenses. The corresponding expense rate increased by more than 40 basis points to 8.7%. The company’s operating margin contracted by 130 basis points to 13.1%
For the first fiscal quarter of 2019, analysts expect Conagra to report an adjusted EPS of $0.49—compared to the adjusted EPS of $0.46 reported in the same quarter in fiscal 2017.
Analysts expect Campbell Soup to report an adjusted EPS of $0.25, which represents a decline of 51.9% on a YoY basis for the fourth fiscal quarter.